A 1600t SSK may not have the endurance, weaponry, speed, and stealth that the PLAN requires of its SSKs, as even up to now you have not made a compelling case for the PLAN to switch to such a small SSK.
As mentioned before, the requirements change significantly once you limit the scope of the SSK's role to littoral ops. With modern AIP technology, small submarines can provide endurance which is perfectly adequate for that task - why pay for overkill which is of no benefit to the intended job? A submarine operating purely in a coastal environment does not need extreme speed and range. Silencing? I think you'll find the current generation of European SSKs does just fine in that regard (the Swedish sub the USN leased to hone their skills against was one of the smallest available).
So the case for smaller boats is patently obvious: cost. Your stated worry with relying on SSNs for blue water work is how expensive they are - well here's an opportunity to release non-trivial amounts of funding for just this purpose by moving to compact, exclusively littoral SSKs. It's a case of horses for courses: since a world-class nuclear-powered sub is so much better at open-ocean and expeditionary warfare, supplementing it in that role with large SSKs is false economy. Fewer SSNs in favour of greater displacement in each SSK is very probably an unfavourable trade-off in net capability.
Another point is that if the PLAN decides to add small nuclear plants to their SSKs to create hybrid designs, I seriously doubt a sub much smaller than the Yuan class is going to be in the works.
SSNs have been built as small as 2700t, and that was with established propulsion technology representing the state of the art from 30 years ago (Rubis). I'm sure it would be possible to do better today, especially with non-traditional solutions (RTG-powered Stirling?) .
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